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Britain Sustains Its Economic Growth,
And Some See a Rate Boost Next Month

By

Silvia Ascarelli Staff Reporter of The Wall Street Journal

Updated Jan. 31, 2000 12:01 a.m. ET

LONDON -- The U.K. economy grew a robust 0.8% during last quarter over the previous quarter, which some economists say raises the odds that the Bank of England will boost interest rates next month.

The pace of economic growth meant that gross domestic product increased 2.7% in the quarter over the same quarter the previous year. For all of 1999, growth averaged 1.9%, topping the government's predictions of 1.75%. This year is expected to look even better: Economists expect the U.K. economy to expand by 3.1%, according to forecasts compiled by Consensus Economics Inc.

European Union Economy Seen Expanding by 3% in Year 2000 (Nov. 25, 1999)

Given a slew of other economic data over the past week that showed an increasing shortage of skilled labor, capacity utilization at a three-year high and service-sector inflation at a six-year high, the nine-member Monetary Policy Committee will push the benchmark repo rate to 6% from 5.75% when it meets Feb. 9 and 10, predicted Michael Saunders, head of Western European economics at Salomon Smith Barney. U.K. central bankers have raised interest rates three times in the last five months.

Another Report Expected

The meeting comes a week before the monetary committee releases its quarterly inflation report, a more-detailed economic review. Some economists say the need to ensure that interest rates are in line with the inflation assessment outlined in the report makes a February rate increase more likely. Moreover, the minutes from the January meeting, released Wednesday, showed that several members weighed the need to raise rates more than 0.25 percentage point, the amount eventually agreed upon.

Friday's preliminary assessment marked the 30th consecutive quarter in which the economy hasn't contracted, even though growth was flat in the final quarter of 1998. This stretch, which began in the third quarter of 1992, is the longest period of uninterrupted growth the U.K. has had since the 1970s. It's a remarkable turnaround from a year ago, when many economists were predicting a brief recession.

The Office for National Statistics didn't provide a detailed breakdown of economic growth. But it said that growth in the service sector was stronger than it had been in the third quarter. Industrial production, which has been the economy's Achilles' heel, grew in the fourth quarter, albeit more slowly than in the third quarter. The construction sector grew at a similar rate to previous quarters.

The strong data was in line with private economists' forecasts, and growth is running above trend, said Ciarran Barr, senior U.K. economist at Deutsche Bank in London. He expects the U.K. economy to grow 3.3% this year.

No Danger of Overheating

But some said the U.K. economy isn't on the verge of overheating. Moreover, the surge in the pound this month could curb growth during the first quarter. The currency eased Friday after hitting a 14-year high on a trade-weighted basis.

"Growth is not necessarily accelerating," said Robert Barrie, U.K. economist with Credit Suisse First Boston. "It looks better balanced. It's not just about unsustainable domestic demand. It's sustainable domestic demand and net trade."

The absence of an acceleration in the pace of growth also suggests that some of the higher forecasts for growth this year won't be reached, he said. Moreover, his analysis is pointing to a considerable amount of stockbuilding, which suggests that final demand isn't as strong as output would suggest. Mr. Barrie is among the more conservative economists with his forecast of a 2.8% increase in GDP this year. Interest rates should peak at 6.25%, if not 6%, he said.